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Cost Segregation – Save $ On Your Commercial Property

Cost Segregation – Save $ On Your Commercial Property
Cost Segregation – Could Your Commercial Building Be Saving Money You Money?

Cost Segregation has gained popularity over the past few years; however it may be a hidden benefit that many commercial property owners remain unaware and in turn are not reaping the potential rewards.

Most property owners are aware of the depreciation benefits of ownership yet may not be maximizing the savings potential available through cost segregation.  By using the cost segregation method, owners are able to increase cash flows by accelerating deprecation and deferring income taxes.  Under standard appreciation commercial real estate is depreciated over 39 years, but by performing a cost segregation study the owner may be eligible to accelerate depreciation on items such as landscaping, carpeting, cabling, electrical fixtures, etc, to a 15, 7 or even 5 year tax life.  Often times a study may reclassify up to 40 percent of a building’s cost into accelerated cost recovery depending on the scope and use of the equipment.

The major advantage of performing a cost segregation study is the ability to increase cash flow by deferring taxes paid.  In essence, it is like an interest free loan from the government.  In addition, taking into account the time value of money, depending on how long an owner retains an asset, the net present savings is even greater.

In today’s commercial real estate market, the emergence of office condos has presented the opportunity for more business owners to own real estate.  The typical office condo building is purchased in gray shell condition and the buyer builds out the interior to suit the needs of their business or practice.  Depending on the size and extent of the interior improvements, cost segregation may be a very viable option to help increase the bottom line of income and expenses.  Aside from building equity and flexible exit strategies, accelerated depreciation is a major benefit of office ownership.

Cost segregation is not just for new construction however, as long as the building was constructed or acquired by the current owner since 1987 a study can be applied and previously missed deductions can be applied for.

The process of cost segregation, although beneficial, is not simple.  It should only be done through the expertise of a qualified cost segregation provider.  The IRS has stringent guidelines how the studies shall occur and most studies should be done by accountants with proficiency in cost segregation as well as a background in construction or engineering.  An expert should be consulted to determine if a segregation study should be done and if it is an economically feasible decision.  Typically the first year of tax savings should exceed the cost of the study.

Please consult Barbara Lloyd to find out if cost segregation is right for your real estate holdings and ask her to put you in touch with a specialist in the industry.

Barbara Lloyd, CCIM
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